Key points of investment

Incident: The results of a “randomized, open, multi-center clinical study on the efficacy and safety of cooling and humidifying granules versus nematvir tablets/ritonavir tablets in the treatment of the novel coronavirus infection in adults” were recently released in Beijing. Research results showed that from COVID-related symptoms to continuous clinical recovery time, patients' temperature recovery time, cough, sore throat, and fatigue were superior to those in the control group, and the antiviral ability of the control group was superior to that of the test group.

Significant new evidence-based medical evidence has been added to dissipate cooling and humidification, and the company's leading position in innovative traditional Chinese medicine is further highlighted. Kangyuan Pharmaceutical was approved for marketing in 2022 as a new class 3.2 traditional Chinese medicine for treating diseases caused by cold, wet and humid lung diseases. This prescription was made from the five classic recipes of Ma Xing Shi Gan Tang (“The Theory of Typhoid Fever”, Han Zhang Zhongjing), Dianshu San (“Taiping Huimin,” Song, Taiping Huimin and Pharmaceutical Administration), Da Yuan Drink (“The Plague Theory” Ming · Wu Youke), Huo Pu Xialing Soup (“Yiyuan,” Qing Shi Shoutang), and Jujube Lung Diarrhea Soup (“A Brief Guide to Gold Deficiency”, Han Zhang Zhongjing), and the addition of ancient times. The company has strong R&D capabilities, with a R&D cost rate of 15.85% in the traditional Chinese medicine industry in 2023 (not considering ST shares); since 2019, the State Drug Administration has approved the listing of 43 new Chinese medicines (based on approval numbers, the same number below), and the company has a monopoly of 5, ranking first; the 2023 annual report shows that more than 10 new traditional Chinese medicine drugs are in the clinical research stage in the company's R&D pipeline, 3 of which have been declared for production (six flavor diflavin tablets, eosmanthus granules, and yuzan granules). We believe that the company has formed a good R&D system and has a stable leading position.

The inflection point in sales of non-injectable products gradually drove performance beyond expectations.

The market believes that the company's 23Q1-24Q1 non-injectable product revenue growth rate continues to fall below the equity incentive target, the revenue structure improvement falls short of expectations, and the market is worried about whether the results of the company's marketing reforms are remarkable.

We believe: (1) The company's 22Q3-23Q4 accounts receivable declined quarterly, and the 24Q1 month-on-month increase indicates that the company's inventory cycle is entering a new inflection point. We believe that the company's sales are expected to exceed expectations in the context of inventory clearance; (2) the company's non-injectable product revenue growth rate of 22Q3-23Q3 declined quarterly, and both 23Q4 and 24Q1 improved month-on-month. We believe that the inflection point of sales of non-injectable products is gradually driving performance beyond expectations; (3) The 24Q1 company's many operating indicators, such as accounts receivable turnover days, and cash ratio Debt ratio, etc., all At an excellent level in the past 10 years, we believe this also reflects the improvement in the company's operating efficiency under changes in the marketing system, which is expected to bring an inflection point to the company's performance.

Maintain a “buy” rating. The estimated net profit for 2024-2026 is 6.18/7.28/857 million yuan, up 15.18%/17.77%/17.67% year-on-year, and EPS is 1.06/1.25/1.47 yuan, corresponding to PE18.87x/16.02x/13.62x. Considering that the company has strong R&D strength and channel vitality given by marketing reforms, it maintains a “buy” rating.

Risk warning: R&D innovation risk, policy adjustment risk, sales falling short of expectations